30
STOCK DIVIDENDS
to ascertain whether he has received income taxable by Congress without appor-
tionment. But, looking through the form, we can not disregard the essential
truth disclosed; ignore the substantial difference between corporation and stock-
holder; treat the entire organization as unreal; look upon stockholders as partners,
when they are not such; treat them as having in equity a right to a partition of
the corporate assets, when they have none; and indulge the fiction that they
have received and realized a share of the profits of the company which in truth
they have neither received nor realized. We must treat the corporation as a sub-
stantial entity separate from the stockholder, not only because such is the prac-
tical fact but because it is only by recognizing such separateness that any divi-
dend—even one paid in money or property—can be regarded as income of the
stockholder. Did we regard corporation and stockholders as altogether identical,
there would be no income except as the corporation acquired it; and while this
would be taxable against the corporation as income under appropriate provisions
of law, the individual stockholders could not be separately and additionally taxed
with respect to their several shares even when divided, since if there were entire
identity between them and the company they could not be regarded as receiving
anything from it, any more than if one’s money were to be removed from one
pocket to another.
Conceding that the mere issue of a stock dividend makes the recipient no richer
than before, the Government nevertheless contends that the new certificates
measure the extent to which the gains accumulated by the corporation have made
him the richer. There are two insuperable difficulties with this. In the first place,
it would depend upon how long he had held the stock whether the stock divi-
dend indicated the extent to which he had been enriched by the operations of the
company; unless he had held it throughout such operations, the measure would
not hold true. Secondly, and more important for present purposes, enrichment
through increase in value of capital investment is not income in any proper
meaning of the term.
The complaint contains averments respecting the market prices of stock such as
plaintiff held, based upon sales before and after the stock dividend, tending to
show that the receipt of the additional shares did not substantially change the
market value of her entire holdings. This tends to show that in this instance
market quotations reflected intrinsic values—a thing they do not always do.
But we regard the market prices of the securities as an unsafe criterion in an
inquiry such as the present, when the question must be, not what will the things
sell for, but what is it in truth and in essence.
It is said there is no difference in principle between a simple stock dividend
and a case where stockholders use money received as cash dividends to purchase
additional stock contemporaneously issued by the corporation. But an actual
cash dividend, with a real option to the stockholder either to keep the money
for his own or to reinvest it in new shares, would be as far removed as possible
from a true stock dividend, such as the one we have under consideration, where
uothing of value is taken from the company’s assets and transferred to the indi-
vidual ownership of the several stockholders, and thereby subjected to their
disposal. :
The Government's reliance upon the supposed analogy between a dividend of
the corporation’s own shares and one made by distributing shares owned by it
in the stock of another company calls for no comment beyond the statement
that the latter distributes assets of the company among the shareholders, while
the former does not, and for no citation of authority except Peabody ». Eisner.
(247 U. 8. 347, 349-350). u
Two recent decisions, proceeding from courts of high jurisdiction, are cited in
support of the position of the Government. .
Swan Brewery Co. (Ltd.) ». Rex (1914) (A. C. 231) arose under the dividend
duties act of Western Australia, which provided that “dividend” should include
‘every dividend, profit, advantage, or gain intended to be paid or credited to
orfdistributed among any members or directors of any company,” except, ete.
There was a stock dividend, the new shares being allotted among the share-
holders pro rata, and the question was whether this was a distribution of a divi-
dend within the meaning of the act. The judicial committee of the Privy
council sustained the dividend duty upon the ground that although ‘‘in ordinary
language the new shares would not be called a dividend, nor would the allotment
of them be a distribution of a dividend,” yet within the meaning of the act such
new shares were an “advantage” to the recipients. There being no constitu-
tional restriction upon the aetion of the lawmaking body, the case presented
merely a guestion of statutorv construction, and manifestly the decision is not
